Encouraging Signs

Robert S. Reichard

Revised government production estimates based on updated benchmark data confirm that the U.S.
textile and apparel industries are pretty much holding their own in today's relatively modest
economic recovery. At last report, domestic output of basic textile products like yarns and fabrics
were running 12-percent above the low point hit during the 2009 recession. That's the equivalent of
a nearly 4-percent annual rate of increase — and not much different from the rate reported for
aggregate U.S. manufacturing activity over the same three-year period. True, the comparable 2009-12
annual rate of advance noted for more highly fabricated textile products like carpets and home
furnishings was smaller. Nevertheless, this other key mill sector managed to rack up a
close-to-1-percent annual rate of gain. Domestic apparel production over this same three-year
period showed some fractional losses, but here, too, there have been signs of leveling off over the
past 12 months or so. In any case, all of the above marks a significant change from the 10-year
period ending in 2007, the last year before the recent downturn began. During that extended earlier
period, production of basic textiles, more highly fabricated textile products and apparel tumbled
40 percent, 21 percent and 65 percent, respectively — reflecting for the most part the huge import
influx from China and other low-cost producers. But, things are beginning to change, with the shift
over the past three years clearly suggesting that U.S. mills and factories are becoming
increasingly competitive in today's cutthroat global marketplace.

Other Positive Signs Uncle Sam's revised data also provide other indications of an improving industry climate.
For one, they show that the big capacity cutbacks of the past few decades are beginning to slow
down. Thus, production potential for all mills has declined only about 4 percent annually over the
past two years. That's a fair-sized slowdown from the 5- to 6-percent attrition noted over earlier
years. Moreover, given the outlook for relatively steady demand, this upbeat trend should continue.
Also pointing to smaller capacity declines: U.S. mills still seem willing to invest hefty sums on
new facilities. The National Council of Textile Organizations finds that mills spent nearly $17
billion on new plant and equipment over the past decade. This spending is clearly paying off in
terms of impressive productivity gains. Indeed, a comparison of mill equipment and output numbers
suggests mill efficiency is rising at nearly a 3.5-percent annual rate — not that different from
the pace noted for all U.S. manufacturing. And it's pretty much the same for the U.S. apparel
industry. Capacity shrinkage has dropped down to only a 3-percent annual rate — again, well under
the huge declines of the previous two decades, when more than two-thirds of the U.S. apparel
industry disappeared. And here, too, there's been continuing capital investment, for both
modernization and improved efficiency.

Operating Rates Up Finally, a few words on how the new output and capacity numbers are affecting mill and
apparel utilization rates: Here, too, the news is basically positive. More to the point: The new
government statistics show production increasing relative to available capacity. These ratios are
still nowhere near the levels at which U.S. industries would prefer to operate. Nevertheless, any
increases are welcome, as they help dampen competitive pressures. As for the actual numbers:
Domestic textile mills are currently producing at nearly 70 percent of their potential — 13-percent
above their 2009 low, though still far under the 85- to 90-percent levels prevailing through most
of the 1990s. Similar improvement is noted for the apparel sector — with a 70-percent reading
running some 10 percentage points above the 2009 low, though well under the 85-percent levels of
two decades ago. As suggested earlier, all the above has to some extent helped reduce the cutthroat
price-cutting of recent years. Indeed, it may well be why textile and apparel profits have climbed
back into modest positive territory. Moreover, factor in the likelihood of steady demand and the
absence of any cost pressures, and industry earnings could well inch up a bit more in 2013 and
2014.